Transcript Can Money Matter in small island developing states

Can Money Matter in small island
developing states? Evidence using the
Solow estimator
Associate Professor Dr K. C Jankee
(University of Mauritius)
Chairman, Development Bank of
Mauritius Ltd
• Objective is to estimate the contribution of
real money balances to the productive
capacity of Small Island Developing
Economies (SIDS)
• Important issue in the light of the different
financial and monetary policies adopted in
these countries to develop and liberalise
their financial systems
• Important for the strategy of financial
globalisation and increasing economic
liberalisation
Features of SIDS
• Consensus that SIDS are different in a number of
different ways:
 Exposure to Economic conditions in the rest of the world
• Small domestic market and high dependence on exports
• Limited terrestrial natural resource endowments and high
import content
• Limited diversification possibilities
• Dependence on a narrow range of products
• Inability to influence international prices
• Market thinness
Peripherality
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High per unit transport cost
Marginalisation
Uncertainties of supply
Need to keep large quantities of stocks
Trade Vulnerability
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High Dependence on Trade Taxes
Vulnerability of Domestic Industries
Dependence on Trade Preferences
Limitations of the Subsidy Rules
Role of state Trading enterprises
TRIPS
• Proneness to Natural Disasters
• Limited Ability to Exploit Economies of
Scale
• Limitations on Domestic competition
• Difficulties in absorbing FDI
• Limited investment opportunities
• Problems of public administration etc
Literature
• Solow estimator (1957) of output elasticity
of real money balances.
• Empirics:
• Bhattacharyay (1986) computed output
elasticities for the monetary base and
narrow money (M1) for India and Pakistan
• Result indicated very low output
elasticities as in the case of U.S
Present paper computes output elasticity of
real money balances for a sample of SIDS
• - Sample classified into those of low
income, middle and high income countries.
• - sample also divided into those with low
and high level of financial development
Computations
• Output elasticity of real money balances
are computed using three alternative
definitions of money as follows:
• 1. High Powered Money
• 2. Narrow Money Supply
• 3. Broad Money supply
• Opportunity cost variables: treasury bill
rate, money market rate , discount rate
Results
• Results reported for the different sub
samples
• Very low output elasticities of real money
balances
• Ranging between 0.0001- 0.1
• Robustness tests undertaken
Conclusion
• contribution of real money balances to the
productive capacity of the economy
remains very low in the small island
developing economies (SIDS)
Possible solutions to these
economies:
Foreign Ownership of intermediaries
Regional markets
Shared Regional infrastructure
Financial (infrastructural services)
imported from abroad
Regulations and supervision
• Capital Account opening and exchange
rate arrangements
• Thank You